Bat­tle of a re­luc­tant fighter

Farmer with an en­gi­neer­ing de­gree turns to ac­tivism, writes Ann Crotty

Financial Mail - Investors Monthly - - Feature -

L ast year small share­hold­ers dis­cov­ered the pow­ers of the new Com­pa­nies Act. With the back­ing of the act a few heroic souls joined Theo Botha to res­cue the in­vest­ment com­mu­nity from the som­nam­bu­lant ap­proach of our in­sti­tu­tional share­hold­ers.

That’s the ap­proach that tries to per­suade the mil­lions of in­vestors and savers across the coun­try that, de­spite some un­set­tling de­vel­op­ments, all is OK. “Don’t worry, we’re on to it, we’re talk­ing to the board be­hind closed doors,” say the in­sti­tu­tions, with­out any sense of how dis­turb­ing that sounds to the rest of us.

It cer­tainly doesn’t do much to ad­dress the sus­pi­cion that in­sti­tu­tional in­vestors are a lit­tle too close to large listed com­pa­nies for the good of the or­di­nary saver. Those same large listed com­pa­nies just hap­pen to be a valu­able source of the funds for man­age­ment by those in­sti­tu­tional in­vestors.

With any luck 2016’s de­vel­op­ments have marked a new trend in share­holder ac­tivism, and we can look for­ward to much more of it in the years to come. And while the wellestab­lished in­sti­tu­tional in­vestors tend to frown on it, there’s lit­tle doubt that share­holder ac­tivism is in­creas­ingly seen as a cru­cial part of a well­func­tion­ing mar­ket.

The not-so-new Com­pa­nies Act has been in place for more than five long years. Cor­po­rate

lawyer Carl Stein says it gives greater power and en­force­ment rights to South African share­hold­ers than they pre­vi­ously had, and in some cases even more than they would en­joy un­der US or UK law. Un­der the 1973 act mi­nor­ity share­hold­ers had few rights or reme­dies against an abusive ma­jor­ity share­holder or an an­tag­o­nis­tic board of di­rec­tors, wrote Stein in The New Com

pa­nies Act Un­locked. “The few rights they did have were of­ten likened to those of a mi­nor child: the ma­jor­ity share­holder was ‘king’,” he says.

In draw­ing up the new act gov­ern­ment aimed to foster in­vestor con­fi­dence and bring the rights and reme­dies avail­able to mi­nor­ity share­hold­ers into line with those that ex­isted in most First World coun­tries.

Ac­tivists Al­bie Cil­liers and Dave Wool­lam, who took on the Lewis Group, are not hot­shot com­pany lawyers and they’re cer­tainly not hot­shot fund man­agers. They are in­di­vid­u­als who refuse to put up with stuff they shouldn’t have to; the sort of stuff the rest of us just suck up and qui­etly seethe about. They don’t just refuse to put up with it, they try to stop it. While Botha used the an­nual gen­eral meet­ing as the set­ting for most of his bat­tles, Cil­liers and Wool­lam have used the courts to at­tempt to rec­tify per­ceived wrongs.

It is a re­mark­ably brave strat­egy, given how quickly le­gal bills ratchet up.

Un­til now the eye-wa­ter­ing costs in­volved in court ac­tion has ef­fec­tively pre­cluded in­di­vid­u­als and small share­hold­ers from go­ing this route. As Stein says, the new act tips things in share­hold­ers’ favour, but only marginally. It still re­quires con­sid­er­able hero­ism from the in­di­vid­ual share­hold­ers in­volved. They are in­evitably up against a hefty le­gal team that can draw on the tar­get com­pany’s seem­ingly un­lim­ited fi­nan­cial re­sources. Which is why, if there were an an­nual prize for share­holder hero­ism Cil­liers would not only win the 2016 prize (pip­ping Wool­lam) but al­ready looks the likely favourite for the 2017 prize.

He launched two chal­lenges in 2016 (Sovereign un­der sec­tion 163 and KWV un­der sec­tion 164) and when 2017 was just days old he launched a third (Good­er­son, sec­tion 164).

It would be dif­fi­cult to imag­ine a more un­likely hero than Cil­liers, a Cape-based farmer with an en­gi­neer­ing de­gree who has spent much of 2016 ap­ply­ing his sharp and me­thod­i­cal brain to learn­ing what he needs to know about com­pany law. He didn’t plan to spend the year that way. He is, what you might call, the ac­ci­den­tal share­holder ac­tivist, the old-fash­ioned kind who just wants to pro­tect the value of his in­vest­ments.

He has a small port­fo­lio of com­pa­nies he looks af­ter; at the time he ac­quired this port­fo­lio he as­sumed, rather naively as it turned out, that as a mi­nor­ity share­holder he would be treated fairly, es­pe­cially if the com­pany was listed. He be­came an ac­tivist when he learnt that was not the case.

Early on he as­sumed that the JSE, the com­pa­nies & in­tel­lec­tual prop­er­ties com­mis­sion and the takeover reg­u­la­tion panel were all there to pro­tect him. In 2016, when he took is­sue against what he be­lieved was op­pres­sion of the mi­nori­ties by the Sovereign board, Cil­liers dis­cov­ered how lim­ited the pro­tec­tion was that these in­sti­tu­tions of­fered.

In des­per­a­tion he searched the Com­pa­nies Act. He found sec­tion 163, which pro­vides for re­lief from op­pres­sive or prej­u­di­cial con­duct. His was the first op­pres­sive-ac­tion case taken against a listed com­pany un­der the 2008 act.

Though he won, Cil­liers vowed, af­ter what proved to be a wrench­ing ex­pe­ri­ence, to steer clear of le­gal bat­tles. They are in­evitably lengthy and ex­pose un­der­re­sourced small share­hold­ers to hefty le­gal bills that are po­ten­tially crip­pling.

But a few months later along came Vi­vian Imer­man’s Vasari Hold­ings with an of­fer for KWV, one of Cil­liers’ long-

Though he won, Cil­liers vowed, af­ter what proved to be a wrench­ing ex­pe­ri­ence, to steer clear of le­gal bat­tles

term in­vest­ments. The com­pli­cated plan that had been ham­mered out dur­ing a year’s ne­go­ti­a­tions be­tween Vasari and Niveus Hold­ings (which owned 60% of KWV) re­sulted in Vasari buy­ing KWV’s oper­a­tional as­sets, in­clud­ing the KWV brand name, for R1.2bn, to be paid over three years.

As a re­sult, KWV would be fun­da­men­tally changed. Gone were all the wine and spir­its op­er­a­tions and stocks, left be­hind were prop­erty, art and cash pro­ceeds from the sale.

Cil­liers, who has owned KWV shares for years, was not one bit happy about the trans­ac­tion. He wanted out.

He went back to the Com­pa­nies Act and learnt ev­ery­thing he could about ap­praisal rights. Sec­tion 164 gives mi­nor­ity share­hold­ers the right, called an ap­praisal right, to force the com­pany to buy back their shares at a fair value when the ma­jor­ity of share­hold­ers have ap­proved a fun­da­men­tal trans­ac­tion.

Hav­ing de­cided he no longer wanted to be part of what was a dif­fer­ent com­pany — now re­named La Con­corde Hold­ings — Cil­liers had to launch into a com­plex set of pro­ce­dures be­fore he was even en­ti­tled to de­mand his fair value in cash.

While the new act has cre­ated op­por­tu­ni­ties for mi­nor­ity share­hold­ers to chal­lenge cor­po­rate ac­tions, it hasn’t made it easy for them. Maleka Femida Cas­sim, pro­fes­sor of law at Univer­sity of Pre­to­ria, says the process is com­plex and rigid and dif­fi­cult to nav­i­gate with­out le­gal as­sis­tance, so in­evitably a dis­sent­ing share­holder like Cil­liers is faced with le­gal bills.

Cas­sim says de­spite its os­ten­si­ble sup­port for mi­nor­ity share­hold­ers, sec­tion 164 oper- ates in favour of the com­pany and against the share­holder as the share­holder may lose his ap­praisal rights due to an un­wit­ting fail­ure to com­ply with one of the many tech­ni­cal and com­plex steps re­quired.

Cil­liers is now faced with a more sub­stan­tial hur­dle. He must per­suade the court that the R13.47/share he’s been of­fered by Niveus Hold­ings is de­risory and nowhere close to rep­re­sent­ing KWV’s fair value, which he es­ti­mates is about R20-R21/share. Niveus CEO An­dre Van der Veen says the R13.47 was the value de­ter­mined by KPMG, an in­de­pen­dent ex­pert ap­pointed by the board to come up with a val­u­a­tion be­fore the trans­ac­tion was ap­proved.

Cil­liers dis­misses Van der Veen’s of­fer as ridicu­lous and says it ex­cludes any con­sid­er­a­tion for the value of the art and prop­erty. The R1.2bn paid by Vasari for the op­er­at­ing as­sets alone is equiv­a­lent to al­most R17/share. The art and prop­erty left be­hind is es­ti­mated to be worth at least an­other R3-R4/share, says Cil­liers. He also says that in its in­de­pen­dent val­u­a­tion KPMG stated: “This opin­ion is pre­pared solely for the KWV in­de­pen­dent

Cil­liers must per­suade the court that the R13.47/share he’s been of­fered by Niveus Hold­ings is de­risory and nowhere close to rep­re­sent­ing KWV’s fair value

board for use in the in­di­cated man­ner and there­fore should not be re­garded as suit­able for use by any other party or give rise to third-party rights.”

The bat­tle to try to per­suade the court will take time and in­evitably draws Cil­liers into more le­gal fees and ex­poses him to the real pos­si­bil­ity the court will rule in favour of Niveus’s fair-value es­ti­mate. And, as al­ways, in court cases there’s the risk of be­ing sad­dled with an ad­verse costs or­der. Ad­di­tion­ally, as if to dis­cour­age all but the most re­silient of in­di­vid­u­als from tak­ing on the es­tab­lish­ment, dur­ing this lengthy process Cil­liers loses all the rights re­lat­ing to his KWV shares.

Cil­liers ac­cepts it rather sto­ically as part of the price he has to pay for be­ing an ac­tivist. And, he says, he’s learn­ing a lot with each new case. In his just­launched bat­tle against Good­er­son, Cil­liers will ar­gue the 85c/share of­fered to mi­nor­ity is sig­nif­i­cantly be­low fair value. Re­mark­ably, the com­pany, which seems to have less ex­pe­ri­ence of sec­tion 164 cases than Cil­liers, has told him there is no ne­ces­sity for it to make him an of­fer.

Not ev­ery­one is as ex­cited about ap­praisal rights as Cil­liers. Cor­po­rate lawyers and ad­vis­ers find it irk­some. They may come around in time, just as the deal mak­ers in the US, Canada and New Zealand have.

SA’s rel­a­tively new ap­praisal rights have al­ready in­flu­enced cor­po­rate trans­ac­tions. To avoid the pos­si­ble hefty ex­pense of a rush of disgruntled share­hold­ers try­ing to cash out, most fun­da­men­tal trans­ac­tions now spec­ify that the deal must be aban­doned if more than 5% of the share­hold­ers ap­ply for ap­praisal rights.

Al­bie Cil­liers … Dis­cov­ered that in­sti­tu­tions of­fer lim­ited pro­tec­tion

The his­toric La­borie Wine Es­tate in the Paarl re­gion has been owned by KWV since 1972

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.